Overall Materiality in Financial Reporting: The purpose of overall materiality is to establish a threshold that determines the level of misstatement that auditors should be concerned with during an audit. If misstatements exceed this level, they could potentially influence the decisions made by financial statement users. Overall materiality assists auditors in setting the scope, depth, and allocation of resources for the audit.

Performance Materiality: This level aims to provide a practical benchmark for substantive testing, which is lower than the overall materiality. Its objective is to allow auditors to disregard smaller misstatements without compromising the audit opinion. Performance materiality enhances audit efficiency while ensuring adequate attention to critical areas.

Component Materiality: The goal of component materiality is to ensure appropriate audit focus on specific significant transactions, account balances, or disclosures within the financial statements. Even if their absolute amounts are less than the overall materiality, these items may require higher audit standards due to their nature or impact on decision-making. This ensures the accuracy and completeness of crucial information.